What is a Holding Company?

April 28, 2017 by Cameron P. Walker

Holding companies are corporations that are created for the sole purpose of obtaining and managing a controlling interest in other companies. There are several reasons why a holding company may be created. At times, the activity may be a key element in avoiding a takeover situation. In other scenarios, this sort of company organization may be created in order to more efficiently administer resources used in the operation of a particular business.

It is important not to forget that laws governing the formulation of a holding company can differ from one country to the next. For this reason, the lawful definition of this kind of company can often slightly differ around the world. For instance, in most countries it is required that a holding company absolutely controls a minimum of 50% of the voting shares so as to be legally recognised. However, there are some jurisdictions that require that the percentage of voting shares must be higher. If you plan on setting up a business in Switzerland, make sure to bring in the experts to help with the process.

Short Term and Takeovers

A holding company can be set-up to function for a short period of time, or created as part of a long-term management plan of action. The short-term approach is most often utilised should a company wish to avert a hostile takeover attempt. With this kind of scenario, the company basically purchases a controlling number of shares in the business that is under threat of a takeover, and modifies them into shares of stock in the new holding company. The entity that is attempting the takeover will often have a limited amount of time to either agree to share the shares obtained as part of the takeover strategy, or to have those shares be rendered null and void after an agreed period of time.

After the danger of a takeover has been thwarted, the business can then continue to operate under the patronage of the holding company for an indefinite period of time. Nonetheless, it is not extraordinary for the company to offer up its shares for sale to the original investors, effectively returning the business back to its original status. Government requirements that are applicable to the jurisdiction where the company is included will then determine when and how this process can go about.

Other Cases

In other existing cases, the holding company has been arranged to operate for the long term. This method is very common in the financial industry. Banks, for instance, are frequently operated by holding companies. By forming a holding company, the parent entity can provide a wider spectrum of financial services than banks in many other jurisdictions are permitted to offer. Because of the wide range of services being offered by alternative subsidiaries that are controlled by the company, a number of governments do not have any conflict of interest, and therefore support this kind of business model without any problems.